July 15 , 2018

How Using a Single Broad Turnover Measure Can Cost Your Corporation Million$

Business Impact Turnover Measures That Can Dramatically Improve Employee Retention

The simplistic and broad turnover metrics used by most corporations hide the real truth about the business impacts of employee turnover. And as a result, few executives realize that the way HR currently reports turnover is probably costing every major corporation millions of dollars. For example, many firms report a single turnover metric, which is usually the percentage of employees that left during the past year. However, if you managed an NBA basketball team that had 1,000 employees, losing only one would result in a turnover rate of only .001 percent.

Most executives would be satisfied with that extremely low rate. However, what if the single employee that your team lost was named LeBron? Then that single overall turnover percentage number would be greatly misleading, because it turns out that who you lose to turnover and the resulting business losses matter much more than the percentage of employees that you lose.

And that single turnover number also ignores the quality of the replacement. So if you end up replacing LeBron with a player named Homer Simpson, you would have an even bigger turnover problem. Homer would produce much lower on the job performance than LeBron did. And his reduced performance would likely continue over as many as 10 years because no other firm is likely to hire Homer away. And because Homer would remain in the job for 10 years, there would also be a lost opportunity cost. Because without an open position, the firm wouldn’t be able to hire Stephen Curry into Homer’s position for a decade.

In the same light, a single broad turnover percentage keeps your firm from also looking at turnover by the criticality of the position. This is important because it turns out that even if you are a top performer, the position you work in helps to determine your overall business impact. For example, losing a top-performing salesperson with a long-term trust relationship with your best customer would result in a much higher business loss than losing your best janitor, even though both were top performers in their respective jobs.

So all of these factors taken together in my view indicate its time for executives to stop relying on the traditional single overall percentage of turnover (i.e. 18 percent of all employees left last year) and to shift to a series of what I call “business impact turnover measures.”

Expand Your Turnover Measures to Include “Business Impact Turnover Measures” That Reveal the Real Costs 

Rather than relying exclusively on simple across-the-board turnover measures, HR needs to supplement its reporting to include business-impact measures that dig much deeper and reveal the true business impacts of the various subcomponents of employee turnover. There are seven high-impact turnover sub-categories, and they include:

  • Was the turnover in a high-impact position?
  • Was the exiting employee a high-impact individual?
  • Did performance in the position decrease as a result of the turnover?
  • Were there follow-up impacts after the employee left?
  • Could a portion of the turnovers been prevented?
  • Could your firm’s turnover rate be too low?
  • What is the overall effectiveness and the total dollar impact of your retention effort?

It’s not enough to simply know the additional factors. So in the following section, I will highlight the importance of calculating and then reporting a series of more detailed turnover measures covering the business impacts in each of these seven subcategories.

Understanding the Tremendous Value Gained By Reporting More Granular Turnover Metrics

It’s important to be able to explain to senior executives why they should demand that they receive these more granular business-impact turnover metrics. There should be at least one turnover measure in each of the following seven measurement categories. The most important metrics are listed first.

1) Report if the turnover occurred in high-impact positions — The complete set of turnover metrics should reveal the relative business impact of the position that was vacated. In football, we know that the quarterback has a much higher impact on winning than “the Gatorade guy.” So when calculating turnover, the position held by the exiting employee is critical because not all positions have the same level of business impacts. Obviously, revenue-generating jobs like sales and collections have a significantly higher business impact than most hourly administrative jobs. Customer service and product design positions may also have an elevated business impact. Obviously, turnover in executive, key management, and key team leader positions should be reported separately because of their high impact. In some industries, the loss of a CEO, CFO, or CIO can actually have a negative impact on the stock price. Because some business units and teams have high growth rates, revenue, or margins, the turnover rates in those high impact/critical units should be calculated separately and reported to executives.

2) Report whether the departed employees were high-impact individuals — Some individual employees are especially critical to the organization, regardless of the position that they hold. These individuals are sometimes called “regrettable turnover” because their loss is critical to the organization. For example, report when you lose an innovator, because they have such a high impact. The loss of a company founder or an industry icon may signal to others in the industry that there is trouble at the corporation, so their turnover must be considered to have a high impact.

Top performers are both numerous and critical. So a turnover metric that weights the turnover of top performers higher and that also reduces the weight assigned to the loss of low performers adds a lot of value.

In the same light, separately report the loss of exempt diverse employees, employees with essential skills, employees with extensive contacts, and employees being groomed to be future executives (i.e. they are on the succession plan).

3) Report whether the performance in the vacated positions actually decreased — Turnover is critical to the business primarily because it normally results in a reduction in performance in that position. However, there is little net loss in performance when recruiting rapidly replaces the exited employee with a better-performing and more capable one. That means that after effective retention actions, the most powerful solution to high turnover is great recruiting. Obviously, if an exiting individual is critical to the firm’s success, after their departure, the performance in their position will decrease. However, if within three months of adding the replacement hire, the position performance reaches or exceeds the previous level, you have had a “low or no impact turnover,” and that positive fact should be reported to executives as a success. One exception to that rule is that if the key position, as a result of slow recruiting, remains vacant for a significant number of days. And as a result, the cost of the zero production that would occur during these vacancy days (in key positions) should be calculated and reported as part of the cost of turnover.

One additional negative consequence to be calculated occurs if the departed individual was a leader, and as a result, the performance of the team was reduced after their departure. And finally, if no replacement is ever found, the cost of the long-term loss of productivity in this position should also be calculated and added to the total cost of turnover. 

4) Report any follow-up impacts after a departing employee leaves — Sometimes a significant percentage of the costs of turnover occur after the individual has departed the firm. For example, track where the exiting employee took their next job, because if they went to a direct competitor, they will likely aid that competitor a great deal by sharing your firm’s new ideas and best practices. That means losing them has a dual impact, in that the competitor firm increases in value and simultaneously your firm loses value. And because many top performers within six months take between three and five other employees with them to their new firm, the cost of losing those additional employees must also be calculated and reported. If others leave because of the departure of the key employee, but don’t go to the same firm, the cost is lower but they are still significant.

5) Report which turnovers should have been prevented — You can’t fix the causes of turnover or prevent future turnover unless you know what those specific causes are. So use delayed post-exit interviews to identify and report to executives the real reasons why regrettable employees left the firm. And since it is HR and management’s job to prevent turnover, report which individual employee turnovers could’ve been prevented. Preventable causes of turnover can be identified during the post-exit interviews. And they can include a small easily matchable pay raise, a lateral transfer, more opportunities to learn, and more flexibility in their job.

Obviously, some turnover causes cannot be prevented, and they often include retirement, the family moved out of the region, they changed professions, they got an offer from an industry-leading firm, a significantly shorter commute, or they got a raise that your firm couldn’t match. If you calculate the costs of stopping preventable turnover for each individual, this allows you to determine if the costs of retention exceeded the value that the individual employee would have added if they stayed with the firm for a few more years (i.e. the ROI of retention).

6) Report when your firm’s turnover rate may be too low — An extremely low turnover rate could mean that you have a highly effective retention program. But you must also consider an alternative explanation, which is that your turnover rate is low because you have undesirable employees who no one wants to recruit. If you have a significant percentage of your employees who lack initiative, are low skilled, or who can only do it “your firm’s way,” you may have a significantly below-average turnover rate (that you shouldn’t be proud of). Extremely low turnover may also be a result of a weak performance management process or managers who are afraid to release or fire weak performers. In my experience, I have found that voluntary turnover rates (it’s critical to exclude forced turnover) in a business unit below 4 percent should be considered a warning sign and involuntary rates at or below 3 percent definitely require further examination.

You can also use your “preventable turnover percentage” and the percentage of weak performers who are released each year as additional indicators of an effective retention and performance management program.

7) Report the overall effectiveness and the total dollar impact of your retention effort — The most important of all turnover metrics quantify in dollars and report the costs and the negative business and revenue impacts of employee turnover. You should work with the CFO’s office to determine which turnover costs should be included and how they should be calculated.

You should also do a similar calculation showing the value added as a result of the higher employee retention that was produced by your proactive retention efforts. You can also show the performance of the retention efforts by using a split sample approach. This is where one business unit has your retention program applied to it, and nothing differently is done in another similar business unit (the control group unit). If the retention rates, productivity, and the number of business goals that are met increases dramatically in the experimental group (compared to the control group), you have proof of your retention impacts that are hard to argue.

You can provide a softer level of proof of your retention effort’s effectiveness by surveying managers and employees and showing that more than 80 percent are satisfied with your firm’s current turnover rate and your actions for improving it.

Supplemental Micro-Indicators That May Reveal a Turnover Problem 

In addition to the seven categories listed above, there are some supplemental micro-indicators that may reveal that your firm has a turnover problem in some specific areas. They include:

  • Report the positive correlation between business unit retention and its meeting its business goals — Sometimes the simplest way to convince executives that they should invest in retention is to show the statistical correlation between business unit performance and a unit’s retention rate. Work with the CFO’s office to show that for every percentage point decrease in employee retention, the business unit’s performance also decreases by one or more percentage points. This correlation statistic alone may convince more than half of your cynical executives that they must take proactive actions to increase retention and to reduce key turnover.
  • Report high new-hire turnover — The type of micro-turnover that often has the highest cost is the turnover rate among new hires (within six months of starting). The cost is significantly higher because the firm loses its investment in the training provided to the new hire, the need for a replacement means you will have many more position vacancy days, and don’t forget the added costs of re-recruiting (including a manager’s time) for the position.
  • Assess whether there is a perception of a turnover problem — If a significant percentage of your managers and workers indicate in a survey that they “feel” that the organization has a turnover problem (whether that feeling is accurate or not), you may soon actually have one. This is because the perception of a turnover problem will by itself likely cause an increase in turnover among those who can easily leave your firm (simply ask during the post-exit interview if other employees leaving was a factor). In addition, if recruiters at other firms have the perception that your firm has a turnover problem, they will target and raid your firm mercilessly.
  • Identify concentrated turnover — If a majority of your turnover occurs in fewer than 20 percent of your business units, individual managers, or regions, you have what I call “concentrated turnover.” Even though your overall corporate turnover rate is low, this highly concentrated turnover will likely severely reduce performance in the units with the disproportionately high turnover. In a similar light, short-term turnover spikes in any unit, team, or job should also be examined and fixed before they can extend over many months.
  • Identify turnover that impacts continuity — Many firms have individual employees or positions who are key to the continuity or completion of a key project. As a result, this type of turnover is extremely costly because it results in expensive project delays or even complete long-term project failures.
  • Identify post-merger turnover – Within six months after a significant merger or acquisition, losing more than 20 percent of the employees who were designated as “keepers” from either firm should be considered an indicator of a retention problem.

Final Thoughts

The overall key to strategic success in retention is to shift away from the normal intuitive approach that provides across-the-board actions and to shift to a 100 percent data-driven decision-making approach. Obviously, the foundation of a data-driven approach involves reporting the seven categories listed in this article. However, it’s still okay to report a single overall corporate turnover rate. When you do, be sure and include the industry average turnover rate (Note: the U.S. Department of Labor publishes turnover statistics by industry) as a comparison number.

You should also include last year’s overall turnover rate at your firm as another comparison number. Normally any time your firm has a 20 percent increase over a single year (and there has been no dramatic decrease in the local unemployment rate), you can also assume that you have a turnover problem.

And finally, all turnover is not bad and some turnover has a much higher business impact. So go beyond the current broad turnover metrics and demonstrate to senior management the importance of focusing your retention metrics and efforts on regrettable individuals, key jobs, and high-performing business units. Also realize that the key to continuous improvement is the implementation of a data-driven feedback loop, to continually update managers and HR leaders about the changing causes of turnover and which retention tools and actions have the highest impact.

If you really want to stretch the envelope, take the final step and develop an algorithm (like Google’s) that accurately predicts which key employees are considering leaving (i.e. flight risks). Because predictive metrics provide managers with sufficient time to do something about looming turnover.

If you found this article helpful, please connect with me on LinkedIn Facebook and Twitter

As seen on ERE Media.  

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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